As noted on our Benefits Notes blog, on August 21, 2018, the IRS issued its initial guidance on the amendments to Section 162(m) made by the Tax Cuts and Jobs Act, in the form of Notice 2018-68. The guidance is fairly limited and does not completely address some of the questions it takes on. Notably, the guidance on what compensation will not be subject to the amended Section 162(m) under the grandfather rule may be very restrictive with respect to performance-based compensation that is subject to negative discretion, depending on the extent to which that discretion may be exercised under applicable law.
As a reminder, Section 162(m) limits the deduction for compensation paid to certain employees of companies with publicly traded equity or debt (“covered employees”) to $1 million per year. Among other things, the amendments to Section 162(m) eliminated the exception from that limitation for performance-based compensation and redefined covered employees so that once an employee becomes a covered employee, he or she remains one, even after termination of employment. Similar to Section 162(m) as originally enacted, the amendments provide for grandfathering of compensation paid pursuant to a “written binding contract” in effect on November 2, 2017 that is not modified in any material respect. The key areas addressed by the guidance are how covered employees are identified and what compensation will be eligible for grandfathering.
We recommend issuers review their Section 162(m) disclosures in proxy statements as a result of the foregoing.
We have also updated our blog on Preliminary Planning for the 2019 Proxy Season to reflect the foregoing.